European bond markets are reeling from the Iran war's impact on energy prices, with government debt across the euro area and UK sliding for a second day. Germany's bunds are on track for their worst week in a year as investors abandon hopes for ECB rate cuts. The conflict has sent Brent crude toward $84 a barrel, up 15% this week.

Markets had been pricing in steady interest rates and potential rate cuts, but the Middle East crisis has forced analysts to revise forecasts. Morgan Stanley now expects fewer ECB cuts in 2026, while Rabobank removed UK rate-cut expectations entirely. The UK's 10-year yield climbed 25 basis points this week, with Germany's equivalent rate up 15 basis points.

The conflict's duration remains crucial for European inflation and growth prospects. Analysts warn that closure of the Strait of Hormuz could trigger a cascading global crisis affecting energy, petrochemicals, food production, and even public order. Central bankers including ECB Vice President Luis de Guindos acknowledge that prolonged fighting will alter inflation expectations, though Europe's pre-war economic resilience offers some buffer against the turmoil.